Peter Boys, Boys Financial Services

In Search Of Tax Efficient Income For 2012 and Beyond

I’m getting a lot of calls from people asking what income options are available that offer better returns than GICs plus provide better tax efficiency.  Currently 3.25% seems to be at the top end and most chartered banks are offering slightly over 2% for five-year GICs. In other words, one million dollars invested at 3.25% would earn $32,500 gross annual income.  So, someone in the 32% tax bracket would lose $10,400 to tax and be left with $22,000 to spend, without reducing their invested principal.  Is that really the most tax-efficient income that’s available?

Many people who had GICs that were paying 7% or 8% are now facing much less income than they were accustomed to.  Considering the average annual rate of inflation at around 4%, today’s net GIC returns are not even keeping up to this.

Mutual Funds and equities can offer greater growth potential.  Monthly systematic withdrawals from unregistered plans can provide very tax efficient income, unlike withdrawals from an RRSP or RRIF that are fully taxable.  Retirees need to keep in mind that their withdrawal rate should not exceed 4% per year in order to have sustainable income from an average portfolio.  Equity products have significant risk as they are vulnerable to market fluctuations.

Guaranteed income products were introduced in 2005 by life insurance companies.  These provide guaranteed annual increases of the pension fund, plus the potential for additional increases by periodically locking in future market growth.  Unfortunately today’s low interest rate environment is forcing many insurance companies to lower their guarantees, but these still have a place for seniors looking for guaranteed income at better rates than GICs currently offer.

New pension products:  A new class of income generating product with returns tied to bond yields were recently introduced by life insurance companies.  These are designed to provide guaranteed lifetime pension income, with future income increasing the longer the funds are left invested.

Annuities are an investment option offered by life insurance companies for people wanting to maximize retirement income while minimizing tax.  Unregistered annuities offer significantly greater net income than GICs due to preferential tax treatment of the income.  The downside is the invested capital is no longer available unless it’s a principal guaranteed type annuity.  These pay the remaining balance to the beneficiaries or the estate if the annuitant passes away before all the capital is paid out.

Insured Annuities:  This type of annuity involves simultaneously purchasing a life annuity and a life insurance policy.  The annuity provides guaranteed income for one’s lifetime and the insurance policy payout replaces the annuity principal on death.  These are ideal for people wanting to leave a legacy for their children or a favored charity.

GICs held with life insurance companies can offer advantages over those held with banks. With a degree of creditor protection and the ability to name beneficiaries, they allow funds to bypass probate on death and get paid directly to the beneficiaries as fully private transactions outside of the will.

If you have GICs rolling from 8% or more to today’s much lower rates, take the time to consult with a licensed life insurance professional and check out the many investment options they have available from life companies.  It will be time well spent and might result in significantly enhancing your future retirement income.


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